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Did Hedge Funds Drop The Ball On McGrath RentCorp (MGRC)

Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018 as investors first worried over the possible ramifications of rising interest rates and the escalation of the trade war with China. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only about 60% S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of McGrath RentCorp (NASDAQ:MGRC) and see how the stock is affected by the recent hedge fund activity.

Is McGrath RentCorp (NASDAQ:MGRC) a healthy stock for your portfolio? The best stock pickers are becoming less confident. The number of long hedge fund bets retreated by 4 in recent months. Our calculations also showed that MGRC isn’t among the 30 most popular stocks among hedge funds (see the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Chuck Royce

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s take a peek at the new hedge fund action surrounding McGrath RentCorp (NASDAQ:MGRC).

How are hedge funds trading McGrath RentCorp (NASDAQ:MGRC)?

Heading into the third quarter of 2019, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of -18% from one quarter earlier. On the other hand, there were a total of 20 hedge funds with a bullish position in MGRC a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with MGRC Positions

More specifically, Renaissance Technologies was the largest shareholder of McGrath RentCorp (NASDAQ:MGRC), with a stake worth $34.4 million reported as of the end of March. Trailing Renaissance Technologies was SG Capital Management, which amassed a stake valued at $19.4 million. Headlands Capital, Royce & Associates, and AQR Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.

Because McGrath RentCorp (NASDAQ:MGRC) has witnessed a decline in interest from the entirety of the hedge funds we track, we can see that there exists a select few hedge funds that elected to cut their entire stakes in the second quarter. Interestingly, Andrew Feldstein and Stephen Siderow’s Blue Mountain Capital dropped the biggest investment of the “upper crust” of funds followed by Insider Monkey, worth about $1 million in stock. Matthew Tewksbury’s fund, Stevens Capital Management, also cut its stock, about $0.2 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 4 funds in the second quarter.

Let’s go over hedge fund activity in other stocks similar to McGrath RentCorp (NASDAQ:MGRC). These stocks are Cardiovascular Systems Inc (NASDAQ:CSII), The Children’s Place Inc. (NASDAQ:PLCE), Tootsie Roll Industries, Inc. (NYSE:TR), and Heartland Express, Inc. (NASDAQ:HTLD). This group of stocks’ market valuations are closest to MGRC’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CSII 17 117103 -1
PLCE 19 254998 -3
TR 13 93488 -3
HTLD 13 29892 -1
Average 15.5 123870 -2

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.5 hedge funds with bullish positions and the average amount invested in these stocks was $124 million. That figure was $141 million in MGRC’s case. The Children’s Place Inc. (NASDAQ:PLCE) is the most popular stock in this table. On the other hand Tootsie Roll Industries, Inc. (NYSE:TR) is the least popular one with only 13 bullish hedge fund positions. McGrath RentCorp (NASDAQ:MGRC) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on MGRC as the stock returned 12.6% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.

Disclosure: None. This article was originally published at Insider Monkey.

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